University finance: The debate that isn't

The storm over student finance blowing over the cliffs of Bournemouth, where the Liberal Democrats are holding their conference, epitomises many of the dilemmas posed by the credit crunch. The first great gust of concern, and the thing that sets the teeth of leader Nick Clegg chattering, is the devastation of the public finances. He proposes to weather it by proving he can restrain public expenditure, through ditching his party's long-standing pledge to scrap tuition fees, at least as far as the term of the next parliament goes. But the bulk of the activists are sent into shivers by a second blast of cold air – unease about record debt for young people, unease that has only been heightened by a year in finance that has provided ample reminders of just how ruinous private debt can be.

The effect of the standoff is that the Lib Dems are for now without a clear policy on student finance, a position that poses political few problems because it places them in good company. Both Labour and the Conservatives are saying nothing specific about what they will do with the mishmash of fees, grants and loans, both parties using a pending review as their justification for keeping mum until after the general election. This conspiracy of silence survives even though everyone knows something will soon have to give. As the CBI pointed out in a report on Monday, the government has already asked English universities to make savings of £180m over the next two years, and many are budgeting for cuts of 10%-20% – and this despite the fact that investment in teaching and research are already modest by world standards.

The coming review was originally granted to assuage unease about Tony Blair's top-up fee scheme on the Labour left, but the growing expectation is that it will result in an increase in the cap on annual fees from £3,225, perhaps of as much as 100%. That change would be all the more momentous since it would introduce significant variation in fees for the first time, with elite universities charging the full whack, while other institutions provide cut-price courses. Just as happened with the Dearing review – which sat both before and immediately after the 1997 election before proposing the first-ever fees – a strategic choice on universities seems set to be taken at the point in the political cycle where the voters have the least say.

That is a scandal, for there is much to debate about how to provide universities with the extra finance they unquestionably need. Raising the fees together with the headline loans is perhaps the worst option, since it could discourage poorer applicants whose families have experienced spiralling debt. Raising the interest rate on the loans to match that paid by the Treasury would avoid this psychological snag, so it is a somewhat better way to raise £1.4bn a year for the sector. But the growing band of graduates finding work hard to come by would find more expensive repayments hard to swallow. A more appealing option is a graduate tax, which has now found an unlikely champion in the National Union of Students.

Setting aside traditional objections to students paying anything, the NUS has concluded that a tariff closely based on earnings is the best way to go. It would only kick in once a decent wage was obtained, but would then continue being paid for many years no matter how high a salary was achieved, thereby allowing students to invest in their education on the understanding that what they pay back will depend on what they get out of it financially. Big questions remain – particularly about financing the transition, since the scheme would do away with the student loan book, whose privatisation has in the past provided the exchequer with handy upfront cash. It is for the politicians, however, to address such difficulties – or else to explain why they necessitate an improved system of loans instead. As things stand, it is the students and not the politicians who are educating the public over university finance.